Montegut Manufacturing estimated costminimizing quantity usi

Montegut Manufacturing estimated cost-minimizing quantity using production order model to be 500 units. Production averages 100 units per day, while demand is 20 units per day. Holding costs are $3.00 per unit per year, and setup cost is $60.00. If the firm wishes to produce this item in economic batches, what is the demand for this item? How many orders should be placed per year? How many days should be between the orders (Assume 365 days per year)? What are the total costs?

Solution

EOQ = 500, H = $3, S = $60, p = 100/day, d = 20/day

The formula for EOQ is

EOQ = Sqrt (2DS/(H*(1-(d/p)))

Substituting all the above values we have

A. Demand (D) = 5000 units

Production time = Q/p = 500/100 = 5 days

I_max= (Q/p)(p - d) = (500/100)(100 - 20) = 400

B. Average number of orders per year = D/Q = 5000/500 = 10

C. Time between orders = Q/d = 500/20 = 25 days

Annual holding cost = (I_max/2) x H = (400/2) x 3 = $600

Annual setup cost = (D/Q) x S = (5000/500) x 60 = $600

D. Total cost = 600 + 600 = $1,200